SandRidge Sells Gulf Assets For $750 Million To ‘Newcomer’ Fieldwood Energy

Since July, Fieldwood Energy LLC of Houston has gone from virtually invisible to have-to-see-it-to-believe-it in the Gulf of Mexico.

On Jan. 7, three months after closing a multi-billion dollar deal with Apache Corp. (NYSE: APA) for its Gulf assets, Fieldwood announced it would buy SandRidge Energy Inc.’s (NYSE: SD) Gulf assets and Gulf Coast business unit for $750 million, less than the assets were worth two years ago.

Matt McCarroll, Fieldwood’s president and CEO, is treading old waters. In February 2012, his previous company, Dynamic Offshore Resources LLC, sold its Gulf of Mexico assets to SandRidge for $1.275 billion in cash and stock. About $680 million of the deal was cash.

The assets acquired Jan. 7 by Fieldwood comprise of the former Dynamic Offshore Resources assets and the Oklahoma City-based SandRidge’s legacy onshore and offshore assets, Fieldwood said.

“Generally we view this transaction as mixed for SD with the transaction multiples the negative when compared to current SD trading and the asset purchase price … SD bought these assets in early 2012 for $1.3 billion, but the increased liquidity and accelerated growth profile the offsetting positive,” said Ethan Bellamy, senior analyst for Baird Energy.

In the summer, Fieldwood, a small company backed by investment powerhouse Riverstone Holdings LLC, made waves by acquiring $3.75 billion worth of Apache’s Corp’s assets in the Gulf of Mexico, a move that made Fieldwood one of the Gulf’s pro teams 10 months after its initial capitalization.

On Dec. 1, 2013, SandRidge’s total proved reserves for the acquired entities’ assets were 57.2 million barrels of oil equivalent (MMBOE), of which 51% is oil and 72% is developed, according to a Netherland, Sewell & Associates reserve report. Probable reserves were 11.4 MMBOE and possible reserves 9 MMBOE, resulting in total 3P reserves of 77.5 MMBOE. Daily production exceeds 25,000 BOE and is approximately 90% company operated.

The transaction may not come as a tremendous surprise to the Street, since there has been chatter about on again, off again divestiture of the assets to insure SD has sufficient capital to prosecute the development of their Mississippi Lime assets, said Bill Herbert, managing director and co-head of securities for Simmons & Co. International.

“In aggregate, we appreciate that this transaction will make for a cleaner onshore NAM focused and liquids levered growth story; however, we saw no immediate need to divest these cash flow positive assets at this juncture and view this more as a strategic alignment of the business as there was also no need for the incremental capital in the short-term,” Herbert said.

The acquisition further enhances Fieldwood’s position as the owner of the largest asset base on the Gulf of Mexico Shelf with a pro forma leasehold comprising more than 650 blocks and net production of approximately 125,000 barrels of oil per day, which is 54% oil, the company said.

“The acquisition adds further geographic and geologic diversity by expanding our business to include an onshore Gulf Coast division as well as the deepwater Bullwinkle field,” McCarroll said. “Given our substantial footprint across the Gulf of Mexico, which includes over 50 blocks with common interests between Fieldwood and SandRidge, I am confident that we will be able to achieve meaningful operational synergies and cost efficiencies with this combined asset base.”

The acquired assets add a number of near-term, high-quality drilling prospects to Fieldwood’s existing drilling inventory.

“Most importantly, this transaction enhances the financial strength of the company by providing additional liquidity, significant cash flow and further opportunities for growth,” he said.

The sale was prompted because of its ongoing drilling success in SandRidge’s onshore operations and a more focused Midcontinent strategy. The company will receive $750 million of cash and the assumption of $370 million of abandonment liabilities. SandRidge will also retain a 2% overriding royalty interest in certain exploration prospects.

SandRidge's 2014 capex guidance for the Gulf was $115 million, about 38% less than 2013’s $185 million. The company will redeploy the capital expenditures that were previously allocated to Gulf of Mexico development into its Midcontinent assets. The sale erased $105 million of that spending.

SandRidge plans to add three additional rigs during the second quarter of the year, resulting in the drilling of approximately 30 additional gross wells compared to the previous budget. The company now expects to exit 2014 with 29 rigs operating in its Midcontinent acreage, where it continues to discover, delineate and develop new, high rate-of-return opportunities.

SandRidge announced revised guidance for 2014, including production growth of 26% in 2014, an increase from the previous guidance of 12% growth.

“Given our status as a premier operator in the Midcontinent, where we have established competitive advantages including infrastructure networks, sub-surface knowledge and a best-in-class cost structure, we have elected to further focus our efforts into developing this area,” said James Bennett, SandRidge's president and CEO. “Based on our confidence in the asset base, we will increase the pace of development in our six county de-risked focus area where we have over a decade of drilling locations.”

The transaction is expected to close during the first quarter of 2014, subject to customary closing conditions. RBC Richardson Barr acted as financial advisor to the company in connection with the transaction.

Fieldwood has obtained underwritten committed financing for the transaction from Citigroup Global Markets Inc., J.P. Morgan, Deutsche Bank AG New York Branch, BofA Merrill Lynch and Goldman Sachs Bank USA.